India’s key indices posted their best annual gains in three years, with the Nifty up 29 percent to close 2017 at 10,531. The Nifty mid-cap outperformed with 47 percent gains, mostly driven by government reforms, the relentless flow of liquidity, positive outcome of the Gujarat election and optimism of growth going ahead.
Among sectors, Nifty Bank, FMCG, Auto and Metal indices rallied 30-48 percent while the IT index rose 12 percent. The Pharma index fell 6 percent for the year due to various regulatory concerns.
Commodity markets also had a good rally with crude gaining more than 10 percent. Gold rose 13 percent while silver was lacklustre, gaining just 5.5 percent.
FIIs maintained their selling spree for the third straight year in 2017 to the tune of 447 billion rupees ($7 billion). DIIs on the other hand pumped in a record 903 billion rupees ($14 billion) into equities during the year.
For the week, the Nifty managed to eke out small gains (0.4 percent). Optimism prevailed after SEBI's decision to allow exchanges to provide equity and commodity trading from next year and relax entry norms for foreign portfolio investors.
Traders shrugged off concerns related to fiscal deficit after recent data indicated that the government had breached its target. Reliance Communications' debt restructuring plan came as a breather to the investors and banks.
Brent crude hovered near 2015 highs at $66.23 on the back of an outlook for healthy demand amid ongoing production cuts led by OPEC and Russia. The rupee strengthened by 20 paisa during the week to 63.87 a dollar.
The finance ministry came out with a statement highlighting the risks of investing in crypto-currencies, comparing it to a Ponzi scheme. The value of bitcoin has jumped more than 1,700 percent in 2017 and is trading near the $14,000 mark.
On the macroeconomic and interest rate front, Moody’s believes that the continued impact of the HRA revision on housing inflation and elevated fuel prices suggest that CPI inflation is likely to remain in a range of 4.4-4.7 percent for the remainder of FY2018, above the RBI’s comfort zone of 4 percent. Volatility in the monthly CPI inflation readings would persist and thus the RBI is expected to hold rates for an extended period.
The fiscal deficit reached 6.12 trillion rupees ($95.77 billion) or 112 percent of the budgeted target for 2017-18. The government also announced an additional borrowing of 500 billion rupees. With this, the fiscal gap for the current year is likely in the range of 3.5-3.7 percent of GDP.
Monthly GST collection declined to its lowest level since its rollout. The government collected 808 billion rupees ($12.6 billion) for November. That compares with 833 billion rupees in October, 921 billion rupees in September, 907 billion rupees in August and 923 billion rupees in July.
The dip in collection is a matter of concern and can be attributed to lowering of rates in mid-November, though the expansion of tax base should have offset the lower rates.
On the stock specific front, Reliance Communications was the best performer during the week. It gained in excess of 100 percent after it announced its debt resolution plan. The entire monetisation process to repay its debt to lenders will be completed by January-March 2018 as it transforms into a B2B operation.
In the first trading week of the New Year, markets will start training their focus on corporate results for the third quarter and the upcoming Union Budget.
Market participants have already started building up their budget-related expectations, the prime ones related to increased allocations for rural and urban infrastructure.
Focus will also be on rising crude oil prices, inflation and fiscal deficit.
Government bond yields are set to harden as investors expect the RBI to start reversing its easing cycle during the year amid risks of higher retail inflation and concerns over higher government borrowings over the next three months.
Globally, major central banks would be on track to trim their balance sheets and hike rates. Though this will be on expected lines, there could be trouble for emerging markets as liquidity would be constrained and there could be withdrawal from bond markets.
On the macro front, manufacturing PMI for December will be unveiled on Tuesday, while Services sector PMI for December will be declared on Thursday.
Despite rising oil prices and the risk of fiscal slippage, fund flows would continue to chase momentum in the New Year. Investors should now focus on protecting their capital after witnessing huge gains in 2017.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.